Global Tax 50 2016: Christine Lagarde

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Managing director, International Monetary Fund

Christine
Lagarde is a new entry this year

Christine Lagarde became one of the most powerful people on
earth – and a Global Tax 50 regular – when
she became head of the International Monetary Fund (IMF) in
2011.

The organisation works to ensure the stability of the
international money system and, under Lagarde, its mandate
expanded in 2012 to include macroeconomic and financial sector
issues. It monitors global economic trends and developments
that affect the health of the international monetary and
financial system and promotes dialogue among member countries
on the regional and global consequences of their policies.

To promote economic stability, the IMF provides technical
assistance and advice to countries, as well as offering
financial assistance via loans – usually to countries
in economic distress. These loans are a key tool for
influencing the economic policies and measures that a country
implements to improve its financial situation. The lending
arrangement between the IMF and debtors usually involves a
number of conditions being imposed on the country, which often
includes widening the tax net, tax cuts, privatisation of
public assets and rises in sales taxes, designed to increase
investment into ailing economies while balancing public
finances.

Examples of countries that have received assistance from the
IMF this year include Pakistan, which Lagarde praised for
completing a $6.4 billion IMF programme, but said more work was
still necessary. "Despite the marked improvements over the
IMF-supported programme, Pakistan still only collects little
more than half of what is estimated as a feasible amount in
taxes. This means continued efforts are needed to bring more
people into the tax net and ensure that all pay their fair
share."

The organisation is an important voice in global economic
developments and Lagarde has highlighted the role of tax policy
within such developments in several speeches over the course of
2016.

In Abu Dhabi, Lagarde said that revenue mobilisation and
international taxation are two key ingredients for successful
21st-century economies. The ability of countries to generate
robust government revenue is the "lifeblood of modern states",
which "allows governments to provide public goods that support
strong and durable growth". In addition, international taxation
is "an essential means by which governments mobilise their
revenues in a globalised economy," Lagarde said. "We need a
system that discourages the artificial shifting of profits and
assets to low-tax locations. And we need a system that
discourages overly aggressive tax competition among countries.
In other words, we need a tax system in which ordinary citizens
are convinced that multinational companies and wealthy
individuals are contributing a fair share to the public purse,
to the common good."

In a key speech in January 2016, Lagarde expressed the need
for a global policy upgrade. "There is a growing recognition
that the short-term nature and inherent volatility of global
capital flows are part of the problem affecting emerging
economies today," she told her audience in Paris. "There is
also an inherent debt bias embedded in the global tax system.
More generally, the international monetary system would benefit
from a higher share of equity compared with debt flows."

She argued that supervisory frameworks in source countries
of capital could be adjusted, and that recipient countries
could consider policies to make their financial systems more
resilient against capital flows. "Both prudential and tax
policies can play a useful role here. For example, the tax
system could be structured to provide incentives to rely less
on debt and more on direct investment and equity financing,"
she said.

Tax also got a mention in a Lagarde speech in Washington on
November 7, in which she pressed governments to do more to
promote equal economic opportunities for men and women,
particularly equal pay, which she described as a "an economic
no-brainer". In the speech, she advocated advanced economies to
ease the tax burden on second earners and single parents
– both groups that are typically made up of more
women.

Lagarde has not only targeted governments in her efforts to
foster change. In October 2016, she called on businesses to
work together to build a more inclusive and successful global
economy. In their role as leaders, businesses need to rebuild
trust to stamp out tax evasion. "Even a casual observer of the
Panama and Bahamas Papers revelation can see that efforts to
avoid tax not only erode trust, but also short-change society,"
she told the Conference on Inclusive Capitalism in New
York.

"There are no reliable estimates of the amount of tax
revenue foregone through accounts detailed in the Panama Papers
— both legally through sophisticated planning and
illegally through tax evasion. These revelations, however,
clearly show that there is a great deal of both. The resulting
revenue losses represent a missed opportunity for society
— and for pro-growth investments like education,
health, and the environment. An efficient and fair tax system
is an essential part of the circle of reinvestment."

However, outside of her role at the IMF, Lagarde is facing
her own trust dilemma. She stood trial in France on December 12
as part of a long-running fraud case. She is accused of giving
preferential treatment to business tycoon and French politician
Bernard Tapie when she was the French finance minister under
Nicolas Sarkozy. She denies any wrongdoing and the case
continues.